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Accumulation Distribution

Accumulation Distribution is a momentum indicator – it uses a formula to determine if investors are buying or selling a particular stock. By identifying variations between the price of a stock and the flow of volume, this indicator will show if investors are buying or selling.

It is calculated using the following formula:

Acc/Dist = ((Close – Low) – (High – Close)) / (High – Low) x Period’s volume

This method is used in conjunction with other market indicators and analysis to determine when is the right time to buy or sell a security. For example, if during a downtrend there are a lot of high volume days occurring, it could signal that the demand for the stock is starting to increase.

In practice, this indicator is used to find situations in which the indicator is heading in the opposite direction as the price. Once this divergence has been identified, the trader will wait to confirm the reversal and make his or her investment decisions using other technical indicators.

Aroon Indicator

The Aroon indicator is used to identify definable trends in an underlying security (share) and the chance that the trend will reverse. It consists of 2 lines – the Aroon Up and the Aroon Down. The Aroon Up line measures the strength of the upward trend whilst the Aroon Down line measures the downward trend.

The lower the Aroon Up, the weaker the upward trend and the stronger the downward trend. The higher the Aroon Up, the stronger the upward trend and the weaker the downward trend. The main assumption underlying this indicator is that a stock’s price will close at record highs in an upward trend and record lows in a downward trend.

For example, when a stock’s closing price is equal to the highest price over the given period, the Aroon up will have a value of 100, which indicates that the time it has taken for the stock to reach its highest price has elapsed 100%, indicating a strong uptrend. In addition to extreme values, transaction decisions can be based on instances when the two lines cross. For example, when the Aroon up crosses up through the Aroon down, the stock is said to be in a new upward trend and should experience some upward momentum.

Variations to these names include the Marubozu with no upper shadow and a very small lower shadow which is shaven top. A shaven bottom Marubozu has no bottom shadow and a very small upper shadow.

Aroon Oscillator

The Aroon Oscillator is a trend-following indicator that uses aspects of the Aroon Indicator (“Aroon up” and “Aroon down”) to gauge the strength of a current trend and the likelihood that it will continue.

The Aroon Oscillator is calculated by subtracting Aroon Down from Aroon Up. Readings above zero indicate that an upward trend is present whilst readings below zero indicate that a downward trend is present.

Aroon up is used to measure the strength of the upward trend whilst Aroon down is used to measure the strength of the downward trend. Many traders will watch for a cross above the zero line to suggest the beginning of a new strong upward trend. On the other hand a cross below zero would indicate the start of a downward trend. Readings near zero suggest that a security may be trending sideways and that this period of consolidation could continue.

Average Directional Index (ADX)

This is an indicator that is used to determine the strength of a prevailing trend. The ADX is measured on a scale between 0 and 100. Even though the scale is from 0 to 100, readings above 60 are relatively uncommon. A low reading, below 20, indicates a weak trend and a high reading, above 40, indicates a strong trend. This indicator does not allocate the trend as bullish or bearish – it merely assesses the strength of the current trend. A reading above 40 can indicate a strong downward trend as well as a strong upward trend.

Traders use a move above 20 to suggest the start of a new trend (either up or down) and a move below 40 to suggest that the current trend may be coming to an end. The ADX is a derivation of two separate indicators known as direction momentum indicators (+DI and -DI). Unlike the ADX, these direction momentum indicators can be used to gauge trend direction and are commonly plotted alongside the ADX.

It’s important to determine whether the market is trending (moving upward or downward) or trading (moving sideways) – certain indicators give more useful results depending on the market doing one or the other.

Breadth Advance/Decline

This indicator is designed to track the momentum of the market and anticipate large upward or downward movements in price. This is based on the premise that the number of advancing securities accompanying a market rise is positively correlated with the probability for further advances. Likewise, the number of declining issues pushing the market downward can be correlated with the probability for further declines.

One type of interpretation involves extremely bullish or bearish behaviour. When the Breadth Advance/Decline goes above .66, it can be considered very bullish conditions. If it falls below, .37, it can be considered very bearish conditions.

When the indicator goes from negative to positive (crosses above .500) a bullish climate can be interpreted for the market, and confirmed by other indicators for individual stocks or industries.

Crossover

The point on a stock chart when a security and an indicator intersect. Crossovers are used by technical analysts to aid in forecasting the future movements in the price of a stock. In most technical analysis models, a crossover is a signal to either buy or sell.

An example of a crossover would be when the security line breaks through its 25-day moving average which may be a signal to buy the stock. Some of the indicators that use crossovers are “Moving Average” and “Bollinger Bands”.

Fakeout

This is when an investor is using a MACD and they assume that a change in trend is about to start. As shown in the chart two fake outs have occurred where they have not crossed over to support a change in trend. Yet they have come extremely close. If an investor had purchased at these two points then they would have seen losses in their portfolio.

Once again it is noted that not just one indicator should be used to determine a buy or sell signal.

Fibonacci Arc

This is a charting technique consisting of three curved lines that are drawn for the purpose of anticipating key support and resistance levels and areas of ranging.

A Fibonacci arc is created with an invisible trend line between two points. This is usually the highest and lowest point within that time period then illustrated with three curves that intersect this trend line at the key Fibonacci levels of 38.2%, 50% and 61.8%. Buying decisions are made when the price of the asset pass through these key levels.

Fibonacci Extensions

Fibonacci Extensions are the levels used in Fibonacci retracement to identify support or resistance levels. Extensions can be identified with levels beyond the standard 100% level and is used as guidance by traders to determine areas where they will wish to take profits. The most popular extension levels are 161.8%, 261.8% and 423.6%.

Most traders would use Fibonacci extensions along with other technical indicators and patterns to help interpret appropriate target prices. For example, 161.8% level target is calculated by multiplying the vertical distance of the triangle by the key Fibonacci ratio of 61.8% and then adding the result to the upper resistance of the triangle.

Fibonacci Fan

This is a technique where three diagonal lines are drawn on Fibonacci ratios to help identify key levels of support and resistance.

Fibonacci fans are created with trend lines being drawn represented by the highs and lows throughout a given time period, and completed by dividing the vertical distance between the two points by the key Fibonacci ratios of 38.2%, 50% and 61.8%.

Not three ‘fan’ lines that are created by drawing a line from the left to represent the highs and lows within the fan.

Fibonacci Retracement

This is a term used in technical analysis that refers to the likelihood that a financial asset’s price will retrace a large portion of an original move and find support or resistance at the key Fibonacci levels before it continues in the original direction. These levels are created by drawing a trend line between two extreme points and then dividing the vertical distance by the key Fibonacci ratios of 23.6%, 38.2%, 50%, 61.8% and 100%.

Fibonacci retracement is a very popular tool used by many technical traders to help identify strategic places for transactions to be placed, target prices or stop losses. The notion of retracement is used in many indicators such as Tirone levels, Gartley patterns, Elliott Wave theory and more.

Leonardo Fibonacci was a mathematician in 12th Century Italy. His study of Fibonacci numbers (a sequence of numbers where each number is the sum of the two previous numbers) is often applied by modern technical analysts to find support and resistance in stock charts.

When one Fibonacci number is divided by the next number in the sequence, the result is approximately 62%. When that Fibonacci number is divided by the following number, the result is approximately 38%. These are the key Fibonacci retracement levels.

The principle behind a Fibonacci retracement is that after a stock moves upward or downward, the price will often retrace or correct some of this movement. Many technical analysts believe that the amount of retracement will often correspond to one of the Fibonacci levels. The five horizontal lines represent percentages of 100%, 62%, 50%, 38% and 0% (with 62 and 38 being Fibonacci numbers).

This indicator can be useful for identifying support and resistance levels when stocks correct upwards or downwards from a high.

Money Flow Index

This is a technique where three diagonal lines are drawn on Fibonacci ratios to help identify key levels of support and resistance.

Fibonacci fans are created with trend lines being drawn represented by the highs and lows throughout a given time period, and completed by dividing the vertical distance between the two points by the key Fibonacci ratios of 38.2%, 50% and 61.8%.

Not three ‘fan’ lines that are created by drawing a line from the left to represent the highs and lows within the fan.

On Balance Volume (OBV)

On Balance Volume is a technical analysis tool that is used to detect momentum – the calculation of which relates volume to price change. OBV provides a running total of volume and shows whether this volume is flowing in or out of a given security. This indicator was developed by Joe Granville.

OBV attempts to detect when a stock is being accumulated by a large number of buyers or sold off by a large amount of sellers. Traders look for an upward sloping OBV to establish an uptrend and a downward sloping OBV to interpret a downtrend.

Finding a downward sloping OBV while the price of an asset is trending upward can be used to suggest that the informed traders are starting to exit their positions and that a shift in trend may be coming.

On Balance Volume (OBV)

On Balance Volume is a technical analysis tool that is used to detect momentum – the calculation of which relates volume to price change. OBV provides a running total of volume and shows whether this volume is flowing in or out of a given security. This indicator was developed by Joe Granville.

OBV attempts to detect when a stock is being accumulated by a large number of buyers or sold off by a large amount of sellers. Traders look for an upward sloping OBV to establish an uptrend and a downward sloping OBV to interpret a downtrend.

Finding a downward sloping OBV while the price of an asset is trending upward can be used to suggest that the informed traders are starting to exit their positions and that a shift in trend may be coming.

Simple Moving Average (SMA)

The Simple Moving Average indicator is referred to as SMA. This is often used to identify trends of which way a stock may be traveling either being up or down in value. A signal may be generated using two SMA’s with different time periods and is often considered a stronger indicator of when to buy and sell.

With this chart we are looking at the purple line being a 15 day moving average and the red line being a 50 day moving average it is said that when these two lines cross as you can see marked “Crossover” this is considered a confirmation in a change of direction.

Therefore an investor is able to use this information to help assess if it is a good time to buy or sell this particular stock.

Rate of Change (ROC)

The rate of change is the speed at which a variable changes over a specific time period. Rate of change is commonly referred to in relation to momentum and is usually represented as a ratio between a change in one variable relative to a corresponding change in another.

In a graph, the Rate of Change is presented with the slope of a line. Rate of change is often illustrated by the Greek letter delta.

This is a popular tool for traders as they rely of the speed at which one variable changes relative to another. For example, option traders study how closely the rates of change in the price of an option relative to a small change in the price of the underlying asset, known as an options delta.

Rate of Change (ROC)

The rate of change is the speed at which a variable changes over a specific time period. Rate of change is commonly referred to in relation to momentum and is usually represented as a ratio between a change in one variable relative to a corresponding change in another.

In a graph, the Rate of Change is presented with the slope of a line. Rate of change is often illustrated by the Greek letter delta.

This is a popular tool for traders as they rely of the speed at which one variable changes relative to another. For example, option traders study how closely the rates of change in the price of an option relative to a small change in the price of the underlying asset, known as an options delta.

Simple Moving Average (SMA)

The Simple Moving Average indicator is referred to as SMA. This is often used to identify trends of which way a stock may be traveling either being up or down in value. A signal may be generated using two SMA’s with different time periods and is often considered a stronger indicator of when to buy and sell.

With this chart we are looking at the purple line being a 15 day moving average and the red line being a 50 day moving average it is said that when these two lines cross as you can see marked “Crossover” this is considered a confirmation in a change of direction.

Therefore an investor is able to use this information to help assess if it is a good time to buy or sell this particular stock.

True Strength Index (TSI)

True Strength Index (TSI) is a technical momentum indicator traders use to determine market conditions where there is overbought and oversold stock by combining the short-term purchasing momentum of the market with the trailing benefits of Moving Averages. The true strength indicator is a variation of the relative strength index.

A signal line (7-day EMA) is usually added (as it is to the moving average convergence divergence indicator) to help identify reversals. In addition, values of -25 and +25, like the levels of 30 and 70 used in the relative strength index, can also be used to identify levels where a security is overbought or oversold

Volatility

Volatility measures the statistical distribution of returns for a security or an entire index. Usually volatility is measured by using the standard deviation or variance between returns from that same security or market index. A common school of thought is, the higher the volatility the riskier the security.

Volatility is key for Options trading. It is used as a variable in option pricing formulas and shows the full potential to which the return of the underlying asset will fluctuate between current price and the option’s expiration. Volatility is the amount of uncertainty or risk about the size of movement in a security’s value.

High volatility means that a security’s value can potentially be spread out over a larger range of values eventuating in the price security having dramatic movements in either direction in a short amount of time. A lower volatility means that a security’s value does not fluctuate dramatically, but changes in value at a steady pace over a period of time.

Volume

Volume is simply the number of shares or contracts traded in a security or an entire market during a given period of time. It is the amount of shares that trade hands from sellers to buyers as a measure of activity. If a buyer of a stock purchases 100 shares from a seller then the volume for that period increases by 100 shares based on that transaction.

Volume is an important indicator in technical indicators as it is used to measure the worth of a market move. If the markets have made strong price move either up or down the perceived strength of that move depends on the volume for that period. The higher the volume during that price move the more significant the move.

Volume can be a very powerful indicator in technical analysis. During trending markets, volume tends to be positively correlated with the direction of a trend. In a longer-term upward trend, there will tend to be higher volume as the price goes up and lower volume as the price goes down. During a longer-term downward trend, there will tend to be higher volume as the price goes down and lower volume as the price goes up. If these characteristics are not exhibited, it can potentially signal the changing of the overall trend. This analysis can also be done on shorter and intermediate trends with certain characteristics.

During sideways markets, a higher level of volume can mean that the price will break out of that trading range. Prolonged periods of lower volume can indicate high levels of uncertainty about the future direction of the price, often found in sustained sideways markets or market bottoms.